McDonald's is lovin' rising sales due to a new menu and outlook

For fans of 1990s Hollywood blockbusters it's a plot that sounds vaguely
familiar. A customer walks into a fast-food restaurant and asks for an item
off the menu. The employee looks at the clock and says the sale can't be
made because it's the wrong time of day.

Image 1 of 4

A McDonald's restaurant in New York. Sales at the fast food chain rose 7pc in JulyPhoto: Alamy

Image 1 of 4

The fast-food giant plans to double its number of Chinese outlets in the next three yearsPhoto: Alamy

Image 1 of 4

McDonald's was one of only two Dow Jones Industrial Average constituents to see an increase in its share price in 2008Photo: Getty Images

But this wasn't a scene from Michael Douglas's 1993 hit Falling Down – where his character turns a shotgun on staff who refuse him breakfast because he's three minutes late – but a real McDonald's drive-through in Toledo, Ohio.

Customer Melodi Dushane was so upset she couldn't buy chicken nuggets during breakfast time that she reached through the glass portal and punched two employees. She was last week sentenced to six months in jail. If a brand can create that much loyalty – enough to go to prison for – then it must be do something right.

Just how right shone through in July when like-for-like sales rose by 7pc compared to the same month a year ago, its biggest sales increase in 18 months.

"They've been very successful

at improving the quality of their food"

- Steve West, analyst at Stifel Nicolaus

Related Articles

And rather than being fuelled by growth overseas – as has been the case with recent strong results from the bulk of major US companies – growth was across the board. US sales were up 5.7pc, European sales were up 5.3pc and those in Asia, Africa and the Middle East rose by 10pc.

The same was true in the three months to the end of June, when the fast-food giant made a profit of $1.23bn (£788m) against $1.09bn the same period a year ago, on sales up 5pc to $5.95bn, marking its 18th consecutive quarter of growth.

Not for nothing was McDonald's one of only two Dow Jones Industrial Averageconstituents to see an increase in its share price in 2008, the worst year for equity markets since the dot-com bubble burst.

But given the prevailing economic headwinds - headwinds that appear only to be strengthening in recent weeks - its continued performance reflects the resilience of the McDonald's brand. And the key to that brand, which was 70 years old in May, is - in spite of Melodi Dushane's incident - flexibility.

Take the recession. In order to counter rising cheese prices and the prospect of franchisees losing money, McDonald's altered the mainstay of its then five-year-old "dollar menu", replacing the double cheeseburger with a McDouble, which had one, not two, slices of cheese, and selling the cheesier version at $1.19. A JP Morgan analyst at the time estimated that customers opted for the double 70pc of the time, boosting the average restaurant's cash flow by more than $20,000 a year.

"We started with the dollar menu in the US in 2003, and part of what we realised McDonald's stands for is offering everyday affordable value to customers," Pete Bensen, McDonald's chief financial officer, explained to The Daily Telegraph, going on to say that this works better than offering "sporadic" discounts. "It was about 14pc of sales in 2005, and today it's still about 14pc of sales," he admits.

However, one recent introduction in the US, in January of this year, was the new breakfast value menu. Breakfast can account for as much as a quarter of sales at a fast-food outlet, and in the US it is a $57bn-a-year business. But persistently high unemployment rates had been reducing breakfast traffic, with Jeffrey Bernstein, of Barclays Capital, saying recently: "Typically, if you're unemployed, you're not getting up at six and not going through the drive-thru."

That said, and in no small part because of the introduction of its cheaper morning offerings, McDonald's appears to be holding its own. A recent study by Scarborough Research showing that of the approximate one-third of American adults who ate breakfast from a fast food chain in the last month, almost half did so under the "Golden Arches".

But if the story of the past three years for McDonald's appears to have been about dumbing down in its domestic - and largest - market, Bensen would argue otherwise.

Although the company has spent a considerable amount of time recognising that it is not the aspirational brand it once was in the US – and has targeted its offerings accordingly – that is not to say its decisions have all been about trading down. He points to the introduction of its SnackWraps tortilla products, known as Little Tasters in the UK, as one way the company is trying to add value.

"It's the price point between the dollar or the pound saver menu and the full menu. If customers trade up periodically, then that's a good thing," he says.

The almost bite-sized morsels appeal to both customers looking to bulk up the dollar menu, as well as those buying a full meal who are particularly hungry.

Following its anti-health drubbing on the release of the book Fast Food Nation and the film Super Size Me earlier this decade, McDonald's is also attempting to use higher quality ingredients wherever possible. "A $3 Aberdeen Angus burger? People thought that was crazy a year ago, but in the context of value that is a form of value that resonates as well with the customer as the dollar value," says Bensen.

The most recent surge in sales, though, has flowed not from tinkering with food items, but the expansion of its higher margin drinks offering, as it attempts to take on - at least on its home turf where 44pc of its 32,000 global restaurants lie - the likes of Starbucks and Dunkin' Donuts, which have traditionally ruled the roost in this area.

July's sales boost was in large part credited to the rise in popularity of fruit-based drinks and frappé sales, part of its McCafe range of drinks that has slowly been rolled out over the past few years.

"They've been very successful at improving the quality of their food," said Steve West, analyst at Stifel Nicolaus. "They've really invested in their brand."

West believes one of the real benefits of the drinks expansion is that the company now longer appeals to "single white males," having widened its base with the introduction of salad bowls and lighter calorie meals.

At the same time as the McCafe roll-out took place, 85pc of franchisees used the fact that design changes were needed to their properties to remodel their drive-throughs, which account for 70pc of business in the US, to ensure customers could be served more efficiently.

For Bensen, the developments are products of the company's "Plan to Win" strategy, which it rolled out in 2003 and provides "a framework for each area of the world to adopt a local strategy that works consistently with that plan".

The plan was the result of the media backlash against the company's Super Size portions, and followed its first quarterly loss in history in the last three months of 2002. The fact that McDonald's had a severe shock to the system early may also in part help to explain its success since.

According to brand experts Larry Light and Joan Kiddon, both of consultancy Arcature, the Plan to Win "is not a marketing concept; it is a business management concept" built on brand direction, freedom with a framework and measurable milestones.

Bensen admits: "Years ago, McDonald's developed products but didn't have a robust process as to what consumers were looking for. Today's consumer tastes are changing."

"If you take the same sandwiches

and sell them in a redeveloped

restaurant, sales go up"

- Pete Bensen, McDonald's chief financial officer

Nowhere is this more true than in China, where McDonald's has said it plans to double the number of its outlets from the current 1,100 to more than 2,000 by the end of 2013.

In food terms, best sellers such as the Big Mac and Chicken McNuggets make an appearance but the company also sells chicken wings and a spicy chicken fillet with dark chicken meat to suit local tastes. "There's the core foundation to the brand, but tailoring to meet local needs," says Bensen.

One of the keys to growth is franchising. Around the world, 81pc of McDonald's eateries are franchised, but none in China. He also believes that introducing the concept of the drive-through to the Chinese market will be important in helping to grow.

The expansion will be funded in part by franchisees and in part by leveraging the company's "enviable balance sheet".

McDonald's remodelled 5,000 restaurants around the world during the recessionary years of 2007 to 2009. This year it will spend approximately half of its $2.4bn capital expenditure budget on a further 2,000 remodellings, at the same time as paying out a dividend yielding 3.1pc to investors.

"We're willing to reinvest if we think there's an opportunity for the company and the franchisee," says Bensen. "If you take the same sandwiches and sell them in a redeveloped restaurant, sales go up."

Although the flexibility of the Plan to Win doesn't quite stretch to serving main meals at 5am just yet, it has ensured one of the world's best recognised brands has had a stellar recession and will more than be around the time the next one bites.